Rising inflation was expected, driven by higher tobacco duties, more expensive airfares over the Christmas season, and higher food prices. The BoE has forecast that inflation will fall back in the coming months, though it did expect a less significant increase in December. Mortgage rates have fallen in recent months as lenders compete to lock in borrowers before expected base rate cuts in 2026. However, with inflation key to any potential rate changes, a decision to cut rates at the 5th of February meeting now looks to be off the table.
The increase was the first consumer prices index (CPI) rise since July 2025, when inflation hit its most recent peak of 3.8%, and leaves the UK rate well above corresponding figures for the Eurozone (1.9%) and the USA (2.7%).
David Hollingworth, associate director at broker L&C Mortgages, said: "Fixed rates are already factoring in further reductions to base rate, but the Bank of England has been clear that those will only come when it feels confident that the downward path for inflation is sustainable.
"Today's news isn't likely to see a major market reaction that undoes all that positive movement, but it could mean that we're in for a period where the brakes are applied and mortgage rates flatten out."
Why has the rate of inflation increased?
The rate of inflation for December 2025 was mainly driven upwards by airfares and tobacco prices, though rising food costs also contributed.
Food inflation rose to 4.5% in December 2025, from 4.2% in November, mainly due to higher prices for bread, cereals and vegetables. Core inflation, which is a measure that excludes energy, food, alcohol and tobacco, remained at 3.2%. However, services inflation, which is considered a key measure of underlying price pressures, rose to 4.5% from 4.4%.
Higher airfares, which had a recorded increase of 28.6%, can be explained in part by how they were recorded in 2025. CPI measures the change in price over the last 12 months, so in this case, from December 2024 to December 2025. In 2024, the December airfare figures were recorded on 24th and 31st, while in 2025, the 23rd and 30th were used. This slight shift means that two of the busiest air travel days of the year were used in 2025, with many people paying high prices to get to their destinations in time for Christmas or the new year, rather than two much quieter days when prices would naturally be lower. The contrast between busy and quiet days could be part of the reason why the recorded increase was so sharp.
There were also political choices which had an impact. The Autumn Budget increased tobacco duty, but also included measures to reduce pressure on household budgets, such as freezing rail fares and reducing energy bills.
Some important areas of the economy bucked the trend and slowed in December 2025. Private rents, measured as part of the cost of housing and household services, rose by 4% compared to 4.4% in November 2025, the slowest annual pace in more than three years.
Where will interest rates go in 2026?
The Bank of England's Monetary Policy Committee (MPC) will next meet on 5th February 2026 to decide whether the base rate of interest should change. At its last meeting on 17th December 2025, the MPC voted by a slim 5-4 majority to reduce the rate by 0.25 percentage points, to 3.75%.
The expectation from the Bank is that lower energy bills and only marginal economic growth will bring inflation down to its 2% target in the second quarter of 2026, creating the conditions for a base rate cut. It will also be buoyed by annual private-sector wage growth cooling to its slowest rate in five years, at 3.6% in the three months to November. In fact, the swaps market has priced in a quarter-point cut before June, most likely in April.
There is a chance that the economic outlook could change. For example, energy bills may not stick to the expected downward trajectory, as we have reported. A further increase to inflation, or even a fall that does not meet forecasts, would likely curtail the chances of a Spring rate cut.
The overall expectation, however, is that rates will fall this year as inflation and wage growth reduce. Michael Saunders, a former rate-setter at the Bank, said: "[the increase to inflation] is not the start of a new upward trend, it reflects a variety of fairly temporary erratic factors". He expects only "gradual" cuts in 2026 as "inflation and pay growth are still too high for comfort'.
If you are interested in learning more about where interest rates might go in the future, check out our article on the latest UK interest rate predictions.
What to do if you're struggling to pay your bills
Household bills are rising, but there is help available if you are struggling. If you think you are likely to fall behind on your bills, reach out to the relevant utilities supplier, your council or your mortgage lender to explain your situation. There will typically be policies in place to help you create a realistic payment plan that can help you avoid late fees and other charges.
You should also make sure you are claiming all of the help you are entitled to by checking your eligibility for benefits through entitledto.
We also have a number of articles that may be more specific to your situation and could offer further help:
- How to save money on your energy bills
- How to save money on your water bills
- How to save money on your mortgage
- How to save money on your council tax
- Where to get free debt advice
£200 Pension Cashback Offer
Make a qualifying deposit or transfer a pension to our partner Interactive Investor.
- Deposit or transfer a pension of at least £20k and you could earn £200 cashback
- Terms and Fees apply, Capital at risk
- New & Existing customers opening a SIPP
- Offer ends 30th June 2026
Before starting your transfer, check you won't lose any valuable benefits (such as guaranteed annuity rates or a lower protected pension age) and find out what exit fees you might have to pay
